Using a trust to create value for your family

Using a trust to create value for your family.

When you have children or pets, sometime creating a sustainable income stream to keep them fed is difficult. A retirement fund can help buy creating an annuity, but of great help is a trust. A living trust allows someone to transfer legal ownership of assets to a trustee and remove the asset from their ownership to create continual wealth for others. We call this trust ability to create wealth- intergenerational wealth, or money that is created and passed down from generation to generation. It is the way you can protect from the grave. An Inter Vivos Trust is the mechanism we use in South Africa to protect our assets while we are alive. A testamentary trust is created by means of a will at the death of a person and is normally used to protect the minors. Any trust is an agreement between an owner of assets and trustees. In terms of this agreement, the trustees undertake that they will administer the trust’s assets with the necessary care to the benefit of the beneficiaries. We call this a fiduciary duty. the Trust Property Control Act 57 of 1988 applies to trusts.

Who May Need a Trust:

  • Minors-If a under 18 years of age heir to an estate which has no trust clause, the inheritance must be paid into the Guardians’ Fund of the Master of the High Court.This gives a low interest rate and a trust is beneficial.
  • Persons, such as those suffering from senility or mental disorders, that cannot take care of their own affairs-If persons are not able to take care of their own affairs due to physical or mental conditions, the family would have to have their assets placed under the protection of a curator. Trusts can provide this safe haven.
  • To protect assets-A trust could be structured in such a way that it does not vest in your hands and will therefore not form part of your estate. In the event of your insolvency, creditors will not be able to lay claim to these assets.
  • Complex Family Structure- If you are divorced, a trust will ensure the family is protected fairly
  • Assets that you do not wish sold at death are  able to be kept in a trust until the right moment to sell them arrives
  • Assets that are shared: holiday homes and farms are ideal to put in a trust.

A trust costs money to create and run, however the trustees are bound to the trust document and not to a retirement law, making a trust ideal for looking after pets or maintaining an income flow to a person who may not be capable of looking after their own affairs..

Trusts have serious restrictions though.

 A trust formed and domiciled in South Africa, cannot invest offshore directly.

Sars taxes any  Income in a trust is at 45% and applies the inclusion rate for CGT for any capital disposals, at 80%- creating a normal effective rate for CGT in trusts at 36%.

You can only donate R100 000 per annum without tax implications. Interest-free loans are normally created to transfer assets into a trust. This loan is static and will not increase unless the planner transfers additional growth assets to the trust. However be aware that the sale of an asset may give rise to capital gains tax at the point of transfer.

The benefit of this transfer of  growth assets is the removal of deemed capital gains tax on death as there is no capital gains tax on a loan account. As the loan account is pegged so too is the associated executors fees and estate duty tax.

What if the trust receives dividends from its investments and the planner requires these dividends to supplement his/her lifestyle? At this point the trust can utilise these already taxed dividends to repay the loan owed to the planner. This achieves a double benefit – the growth of the investment takes place outside the planner’s estate and the value of  the loan account is reduced and so reducing death duties if the estate is over R 3.5 million..

So how can we look after the money in a trust?

The trustees have the ability to determine how they wish to deal with the taxable income and or capital gains on an annual basis The trustees should ensure all income and earnings by the trust should ideally be directed to low income earners. In effect the trust is then a conduit pipe and lets the income and capital gains flow through to the beneficiaries This means the tax will be in the beneficiaries’ hands at a lower rate. However remember that if the beneficiary is under the age of eighteen and is the child of the person who lent the money to the trust then the income will be deemed to belong to the parent anyway.

An endowment is taxed at a flat rate of income tax at 30% and the capital gains tax (CGT) effective rate can be as low as 12%. This creates a tax saving, however the time frame should be more five years, due to the limitations on this product and the high administration costs. The investment portfolio can have an offshore allocation and thereby have offshore exposure in endowments.

Unless the trust instrument specifically permits or forbids certain investments, a trust fund’s capital can be invested in any asset. An investment should be diversified in a mix of asset classes – such as equities, property, bonds, and cash – according to the aim of the investment. Growth assets such as equities and property are a good fit for the longer time horizon of a trust.

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